Free Trade, Friend or Foe

Free trade will help the global economy to expand and grow, but at what cost? Free trade cannot possibly be in the best interest of the poorest countries in the world where most resources are lacking. With wealthy countries becoming more efficient at producing product poor countries are being pushed out of the market or net able to gain the capital to enter the international market place in the first place. With the constant interference of government sponsoring companies and the lack of education in poor undeveloped companies, a poor country does not have the opportunity to gain a strong hold in the market even if it has an absolute advantage over the rest of the market. Firstly the difference between domestic and international markets will be explained, followed by an introduction into trade theories and the different instruments used in trade policies, finally a conclusion in regards to free trade for poor countries.

As the world is becoming more globalised it is becoming more apparent the differences between a domestic markets and international markets. Three key differences that a country needs to observe when entering the global market is the different Political Systems, Legal Systems and Economic Systems. Each of these three areas will be investigated.

A political system can be measured on two different scales, the first is whether it is a collectivism or individualism society and the second is the degree of totalitarianism or democracy. Collectivism refers to a society where the members work towards common goals. At times the goals of the combined society may need to be put before the individual, during these times the rights of individuals may need to be restricted for the common good of society. Individualism refers to a society where the members can have individual goals and freedoms, people who live in these types of society have more freedom to follow their own ambitions and make their own choices. Individualism in a way is the opposite of Collectivism; a person who lives in an Individualism society can own their own property and put their needs before the needs of the collective society. The Second scale used to measure countries political system is the level of democracy or totalitarianism. A democracy is when all members of the society have the opportunity to take part in the decision making of the society; in modern times most people elect a proxy to make the decisions for them as it would be too time consuming and costly to have every citizen vote on each decision in the society. In a democracy citizens are guaranteed freedom of expression, free media, and regular elections. On the other end of the scale is a totalitarian society where citizens are not given the advantage of freedom of expression, free media or regular elections. Instead of having a government elected by the citizens there is one ruler who runs the country and any citizen who questions the ruler can find themselves in trouble with the law. Some examples and types of totalitarianism are Communist North Korea, theocratic totalitarianism is when an individual rules as per a religious principles for example Iran, and Tribal totalitarianism in Africa is when a society follow the principals of a tribe.

Different countries have different legal systems, the three main systems are: the common law system, the civil law system and the theocratic law system. The Common Law system relies on precedent, custom and tradition; of all the legal systems this has the most flexibility as judges can make decisions based off precedent and also interpret the law to make decisions in modern day cases. The Civil law system is based on a set of laws, this system is inflexible when judges are making rulings, the final legal system is the theocratic law, and this law is based off the interpretation of religious teachings and books including the Karan.

There are two types of economic systems a Market Economy and a Command Economy. A Market economy is run by the people and all companies are privately owned, No one individual controls the planning for the market. A Market economy heavily relies on supply and demand where private companies are affected by the demand for a product. A Command market is heavily controlled by the government. The Companies are owned by the government and quotas and prices are decided on by the government. A command economy is usually found in a collectivism society and a market economy is usually found in a democratic individualism society. It is possible for a country to have a mix of both a command and market economy. A poor country often has a political system which reflects a collectivism society with a totalitarian government, this means that poorer countries find it hard to enter the international market as they are often not given the option of which products they want to do, with the introduction of free trade a country that has a collectivism totalitarian government will find it harder to compete with countries which gain an absolute advantage over the products the poor country can produce.

There are several trade theories which have been used to understand international trade these include; Absolute advantage, Comparative advantage, The hecksher-Ohlin Theory and the New Trade Theory. These theories are explained below in more detail.

In 1776 Adam Smith released a book with his theory of Absolute advantage, his theory explained that a country has an absolute advantage over other countries if they are the most efficient country at producing that product, for example New Zealand trading sheep. If all countries followed Smith’s theory they should only produce what they are efficient at producing and then trade for other products which other countries have an absolute advantage over that product. By using this theory in countries would be able to gain economies of scales and produce a higher output of the one product that they have an advantage over. The outcome of this is that there economy would become more valuable as they can produce more units than trying to produce several different products.

The Comparative advantage which was explored by David Ricardo in 1817 shows that if a Country has an Absolute advantage over several products it should still focus on the most efficient products and import the products that they have a less absolute advantage over. By following this theory a country can again gain economies of scale to produce the one product as opposed to creating many products and not gaining the advantage.

The Heckscher-Ohlin Theory explores the resources that a country has available to use to gain an advantage, for example a country that is rich in coal like Australia should make use of this abundance of coal and gain an absolute advantage.

The New Trade Theory explains how countries which are not endowed with resources can still gain a competitive advantage; this is due to first movers in the market. A First Mover is a firm which releases a new product on the market before any other firm, the firm may not be the most efficient at producing the product but due to economies of scale and the limit on demand one firm may be enough to complete the full need of the international market.

There are seven instruments of trade Policy; Tariffs, Subsidies, Import Quotas, Voluntary Export Restraints, administrative policy and antidumping duties. Tariffs is another word for tax, countries can put a tariff on a product to generate income for the country, a tariff can be placed on imports to increase the price to consumers and help protect domestic suppliers. When tariffs are used an economy can lose equilibrium due to the price for international suppliers being too high and the demand for domestic suppliers being fooled into believing it is more than is required, this can create a surplus of produce in the domestic market.

A subsidy is a sum of money which is paid to domestic suppliers to keep them in business. This can take the form of tax breaks and low interest loans as well as cash grants. This goes against most trade theories as a country may not have an absolute advantage over a product but still be producing the product and paying a premium to keep that product in the Market, similar to Tariffs the consumer loses out and pays more for a product which would be available cheaper if the subsidies were not paid.

Import Quotas are used to limit the number of a certain product that can be brought into the country, this helps Domestic suppliers to stay in business, for example if a country put an import Quota of 100 million kg of coffee beans per year from international suppliers and the demand for coffee beans was 150 million kg the domestic suppliers can be guaranteed a minimum of 50million kg. Unfortunately for consumers this will cause prices to spike once they reach a quota level as they have the option to pay a large import tariff on over quota supplies or pay for domestic products which may be more expensive than the international product, a voluntary export restraints is similar to a import quota the exception is that the restraint is enforced by the export country on behalf of the importing country. A local content requirement means that a percentage of a product must be produced in the domestic country, for example an Australian product would need to have either a certain value amount or percentage amount of Australian made products within the finished product. Administrative policy is when a government makes it harder for a company to import or export a good. The final instrument is antidumping, dumping is a method when a company dumps excess stock onto an international market at a price which is lower than the cost of production, the strategy is to gain new customers loyalty to their product and gain market share in different markets. All of the above mentioned instruments are barriers to stop countries from having a free trade market.

Education is an important factor when it comes to economic growth; it has been shown that a country that invests in educating its citizens has a higher rate of economic growth. Poor nations tend to have a low percentage a children attending school and the quality of the education is quite low. With free trade a country which has a low level of education and a low level of engagement to schooling can find it hard to gain a position in the international market. Unfortunately for these countries if their economy doesn’t grow than they don’t have an increase in income to increase the level of education.

Free trade will help the global economy to grow and expand but it will not help poorer countries to maintain a fair market share in the international market. Due to totalitarian rulers who run a collective non flexible market poor countries will find it difficult to solely produce products that they have an absolute advantage over. As better developed country gain a first mover advantage and the benefit of economies of scale poorer countries will find it hard to produce product that can compete with other products. Even if a poor country has an absolute advantage and an abundance of resources barriers like tariffs and import quotas will make it hard for the country to get their products to market. If a country cannot grow their economy they cannot gain extra funding to improve their quality of education, therefore they cannot grow their economy. Free trade may be beneficial towel developed economies but for the poorer nations it will be anything but favourable.